Critical Retail Savvy
Fixed gas margins and spiraling credit card fees are the rock and a hard place for convenience store owners, making the retail end of the store all the more crucial.
For David Collins, there is no doubt about it. “No product on earth generates more competition than a gallon of gasoline,” says Collins, president of Birmingham-based DC Oil Co. Inc., a gasoline distributor and convenience store chain owner/operator.
Collins started DC Oil and opened his first store in 1997. He now has 80 employees and owns 15 stores — eight in Bibb County and seven across Jefferson, Shelby and Tuscaloosa counties — and operates 12 of them.
Collins says one of his best years in business was 1998, when gasoline was selling around $1 a gallon. Today, even though gasoline is selling well above $3 a gallon, it is much harder to make money. “Running a convenience store is a hard business. You can’t turn your back on it,” Collins says.
According to the American Petroleum Institute, crude oil costs represent 62 percent of each dollar of gasoline sold at the pump. Refining costs and excise taxes account for another 24 percent, leaving 14 percent for transportation and retailing costs. Although margins will vary, it is common for the storeowner to be looking at a gross profit margin in the 8- to 10-cents-per-gallon range. That’s before operating expenses are taken into account.
Collins cites several reasons why profit margins are being squeezed. But what rings his bell the loudest are credit card transaction fees. In 2012, he paid $425,000 in credit card transaction fees, and statewide, convenience stores paid $297 million.
What is especially troublesome to Collins and others is that credit card fees increase when the cost of gasoline rises, yet retailer margins don’t. To illustrate, a typical credit card fee is 2 percent. With gasoline selling at $3 a gallon, the credit card fee would be 6 cents. But at $3.50 a gallon, the credit card fee increases to 7 cents, and the fee would continue to increase with the price of gasoline.
On the other hand, the convenience store’s margin is based on a fixed amount, not a percentage. So if a store operator’s margin is in the 8- to 9-cent-per-gallon range and the credit card fee results in a 7-cents-per-gallon charge, the store’s margin is precariously slim and might even be negative.
Nationally, convenience store credit card fees rose 23 percent to $11.2 billion in 2011, according to the National Association of Convenience Stores.
“There aren’t that many industries that have seen that kind of increase,” Collins says. “When gasoline prices started rising, the credit card fees increased faster. But with us, it doesn’t matter. We make the same per gallon, whether it’s a $40 sale or an $80 sale. You can look at the amount of money the credit card companies are making, and you can trace the increases back to the increase in gas prices.”
In today’s environment, convenience stores have been forced to find ways to improve their margins. Fountain drinks and coffee, for example, present opportunities for stronger margins. Collins has put delis in seven of his stores, hoping to capitalize on the trend of more people grabbing meals on the run.
Collins says his stores carry 5,000 different products. It is not enough to sell carbonated drinks now. Customers also have come to expect energy drinks, sports drinks and more variations all the way around. “You might have a cigarette brand, but you have to carry three different kinds of that cigarette,” Collins says. “You just have to have so many more products now.”
Wayne Hollar, president of Gadsden-based Hollar Co., can attest to how competitive the convenience store industry has become. Hollar continues to own and operate a large convenience store in Gadsden, but the company sold eight other stores, mostly in Etowah County, beginning in 2006.
“It just got to be so competitive, and a lot of petroleum marketers have done what we did in the past few years,” Hollar says. “We were very picky about who we sold to, but our (operators) are really good business people. They’re good people, and they work hard.”
The definition of hard work, it seems, has been ratcheted up a notch or two. “We sold one of our stores to a young Vietnamese couple,” Hollar says. “They can operate the store for less money than we could. One or both of them is at the store every day from 5 a.m. until 11 p.m., seven days a week. They’re there 365 days a year. They haven’t had a day off the past four years.”